Layers can be found just about everywhere you look these days. Planet earth is comprised of many layers. Food has its towering cakes and lasagna that are comprised of layers. In business, a company's strategy can and should have multiple layers. And, perhaps, unlike anywhere else, in the new universe of blockchains, digital assets and Cryptocurrencies, layers are absolutely central to the very blueprint of this new technological world. As we think about the digital realm that human beings are steadily migrating toward, the core pillars upon which the very first blockchains have been constructed are the bedrock principles of decentralization, scalability, and security. It is upon those three pillars that all the layers of the crypto universe are built and connected. Today, the crypto world is comprised of four primary layers with each layer singularly focused on four themes: foundation, scale, application, and interphase.
Setting The Foundation
Let's begin with Layer 1, the foundation. Layer 1 is a common term in the vocabulary of crypto because the first layer, the foundation, is where many of the most recognized names in the industry reside. Bitcoin and Ethereum are the closest things the industry has to household names. They reside in Layer 1, but there are lesser-known companies, such as Polkadot and Algorand, that also make their home here. What they all have in common is that they are the underlying, the foundational, blockchains upon which other layers of technology in the crypto world may be constructed. There is not a finite number of blockchains that could be considered as Layer 1, and new entrants are bound only by the inherent value of their code. By the way, if you can understand and grasp just these basic concepts of the crypto world's Layer 1, you are likely to be the star of many a dinner party conversation!
Layer 2 is comprised of technologies that are focused on, or specialize in, accelerating the scalability of blockchains. Some of the most recognizable and well-regarded companies now operating in Layer 2 include: Chainlink, Plasma, Polygon and Lightning Network. What they all have in common is that they are all technologies that are literally overlaid on underlying blockchains. For example, Chainlink is overlaid on the underlying Ethereum blockchain.
There's an App for That
Layer 3 is commonly referred to as the application layer. It consists of the applications themselves as well as the technological protocols or standard operating procedures that enable them to run on blockchains. I know, I know, clear as mud!?! Try to think of Layer 3 as a Rosetta Stone of sorts that enables the interoperability of digital technologies, or to continue with the Rosetta Stone theme, to understand and translate each other's languages. Some well-known categories of applications that reside in Layer 3 include: decentralized exchanges (DEXs); decentralized finance (DeFI); non-fungible tokens (NFTs);[PI18] stablecoins; Central Bank Digital Currencies (CBDCs); and decentralized autonomous organizations (DAOs).
They Are Just Going Through an Interphase
And last, but certainly not least, we have Layer 4. Layer 4 is often called the interphase layer, one of the fastest-growing segments of the crypto world, and is where you place decentralized application entities (dApps). UniSwap, IDEX, CryptoPunks, and MakerDAO are some of the most popular dApps that reside in Layer 4.
The digital world may still be a mystery to many, but like our own physical world, it is an ecosystem—an ecosystem that is constantly evolving, constantly changing; an ecosystem that relies on the balance and cooperation of many different elements to thrive, and, in the case of the digital world, it's all about the layers!
As always, whether or not you are crossing the
digital divide with Rubicon Crypto…please remember to do so with common sense and
with Rational Exuberance.